Monday, September 24, 2007

The enemy within

Meet Jim Flaherty, the enemy from within. Canada’s New Government© has been utterly co-opted by the interests of foreign private equity, foreign big oil, corporate Canada, and oh yes, the Government's own pension plan. We said so from the beginning. When will the press acknowledge reality? $2 billion in annual taxes to Ottawa have been lost due to the "unintended consequences" arising from so-called Tax Fairness Plan?

Perhaps some time before we totally concede economic sovereignty of this country and before we incur the full $7.5 billion loss in annual taxes someone in the mainstream media will connect the dots. We can only hope.

We also correctly predicted that TAQA would buy the trusts after it initially set foot in Canada a mere two months ago. Today they announce the $5 billion acquisition of PrimeWest Energy Trust.

Our country is run not by leaders but by misleaders. Harper is nothing but a follower, a shill for offshore economic interests.

We wrote an editorial on this circa March of this year for the National Post in response to an article written by Diane Urquhart in that same paper. She held the opposite view about the potential "gutting out” that would result from Flaherty’s misguided policy. She said we were being alarmists. Well, now that the horse has bolted, and the barn door is still wide open, does it not seem time to sound the alarm?

Interestingly, after agreeing to publish our op-ed piece as a rebuttal, editor Terry Corcoran renegged saying that he had “checked with some people” and that Diane was “more right" than me. Who did he check with, the Department of Finance? That unpublished rebuttal is contained below in a piece entitled “Independent Analyst is unencumbered by the facts.”

In the news today is the following. Another in a long list of takeovers that coincided with the enactment of the Trust Tax Grab. Coincided, but by no mean a coincidence.

September 24, 2007
PrimeWest Energy Trust Agrees to C$5.0 Billion Sale to TAQA Subsidiary
CALGARY, ALBERTA--(Marketwire - Sept. 24, 2007) - PrimeWest Energy Trust (TSX:PWI.UN) (TSX:PWX) (TSX:PWI.DB.A) (TSX:PWI.DB.B) (TSX:PWI.DB.C) (NYSE:PWI) ("PrimeWest" or the "Trust") is pleased to announce that it has entered into an agreement (the "Arrangement Agreement") with 1350849 Alberta Ltd. ("Purchaser") and TAQA North Ltd. ("TAQA North"), both of which are wholly-owned subsidiaries of Abu Dhabi National Energy Company PJSC ("TAQA"). The Arrangement Agreement provides for the acquisition by Purchaser of all of the issued and outstanding trust units of PrimeWest (the "Units") and all of the issued and outstanding exchangeable shares (the "Exchangeable Shares") of PrimeWest Energy Inc. for a cash consideration of C$26.75 per Unit, all pursuant to a plan of arrangement under the Business Corporations Act (Alberta) (the "Arrangement"). The cash consideration payable for the Exchangeable Shares will be calculated on the basis of the exchange ratio in effect at the time the transaction is completed.

Using a Canadian to U.S. dollar exchange rate of 1.00, this cash consideration equates to US$26.75 per Unit. The actual U.S. dollar equivalent cash price per Unit will be based upon the Canadian to U.S. dollar exchange rate on the effective date of the Arrangement.

The aggregate value of the Arrangement, including the debt carried by PrimeWest and its subsidiaries, is approximately C$5.0 billion on a fully diluted basis. The consideration per Unit pursuant to the Arrangement Agreement represents a 26.5% premium over the 30 day weighted average trading price of the Units on the Toronto Stock Exchange up to and including September 21, 2007.


Too dangerous for the National Post? Here's our op-ed piece that they invited us to write then refused to publish.

Independent analyst is unencumbered by the facts

Yesterday’s opinion piece in this paper featured an article by Diane Urquhart that started by stating: “Brent Fullard of the Canadian Association of Income Trust Investors is wrong to think that Ottawa’s trust tax threatens to sell out Canada.” She then goes on to incorrectly cite various US tax matters to make her flawed argument.

Proof can often be found in the pudding. Here is the pudding that Finance Minister Flaherty is cooking up for Canada as a result of his “hollowing surprise” to tax income trusts at a rate of 31.5%, when he himself acknowledges that the average effective tax rate of Canadian corporations is only 6.2%, and for many like BCE, it is zero, as it has been for some time.

The announcement of Flaherty’s new tax had the effect of reducing the value of the income trust market by $35 billion overnight, an average of $140 million per trust . For those acquainted with capital markets, this created what is commonly known as an “event driven” buying opportunity, where the value of a publicly traded security artificially trades at levels below its true value for reasons unrelated to the business itself. Foreign private equity managers flush with capital are scouring the world looking for such opportunities. Flaherty has handed them a $35 billion bonanza. By simply acquiring these trusts, private equity managers can instantly recapture this lost value by (1) reverting them to corporate form and pay no trust tax, (2) removing the business from Flaherty’s growth limitations, and (3) funding the acquisition with mostly debt, whose interest as a corporation will be tax deductible in Canada and flow totally free of Canadian taxes into foreign tax jurisdictions. This corporate debt leveraging, not income trusts, will lead to immediate tax leakage.

As to the proof, one need not look too far as there have been no less than seven trust takeouts announced in the last two months and six of them involve offshore buyers, mostly private equity buyers with names like Rain and Harbinger and hailing from as far away as Bombay and Switzerland. These six deals amount to $5.5 billion, however they are only a harbinger of what is to come if this legislation is passed into law, as then the torrent of takeovers will freely rain down upon the once vibrant income trust market, leading to the inevitable hollowing out of this important sector of the economy and inducing the very tax leakage outcome the policy was ostensibly intended to avert. Good policy? Unintended consequence? Too late to change?

Concerning Diane Urquhart’s arguments about not having to worry about US takeover interest in the Canadian income trust sector, in particular our energy trusts, her logic is only as good as her knowledge of US tax law. The mistake that she makes is her failure to acknowledge is that certain U.S. IRAs are tax exempt, not tax deferred like RRSPs. That’s why the U.S. taxes income received from MLPs held in otherwise non taxable IRAs. In contrast, the Canadian government does indeed collect taxes from RRSPs and therefore Flaherty’s tax amounts to the double taxation of RRSP accounts holding income trusts.

Diane also neglects to mention that these same tax exempt accounts also cannot claim the “favourable” withholding tax credit that taxable U.S. accounts can claim

With respect to the “special” tax that is paid by IRAs owning U.S. flow through entities, she again only mentions half of the story and ignores the rest. Distributions paid by flow through entities to tax exempt accounts are generally considered unrelated business taxable income (UBTI) and this income is subject to federal income taxes. But there is a $1,000 annual UBTI exemption. And more importantly, U.S. tax amendments in 2004, mean mutual funds can now own flow through entities without penalty. Tax exempt accounts can own shares of a mutual fund without encountering UBTI issues.

Therefore: (1) you can’t compare all IRAs to RRSPs because some have completely different fundamental tax treatment, (2) you can’t say all U.S. investors have favourable tax “incentives” because many of those “incentives” are not available to tax exempt accounts, and (3) you can’t say that tax exempt accounts are treated similarly to RRSPs after the proposed changes because U.S. tax exempts have a $1,000 annual exemption for UBTI and they can own MLPs indirectly through mutual funds.

And finally (4) to the extent that the intricacies of US tax code have any bearing on the decisions Canada makes, I hope Diane Urquhart is not dispensing her advice to any decision makers in Ottawa on this matter which affects Canadian economic sovereignty.

Thursday, September 13, 2007

Game On

Ostensibly the 31.5% income trust tax and the double taxation of income trusts is all about “leveling the playing field” between two business models. Strange then, that so many other business models have been conveniently left out of this exercise: Capital Trust Securities, Private Family Trusts, Private Income Trusts and Private Limited Partnerships to name a few.

Income Trusts that play in the Large Pension Fund League are also excluded from this exercise for some unknown reason. They along with their team owners (governments and unions) are effectively immune from this tax. Be that as it may, it is quite revealing that a sports analogy has been used to describe the goal of this policy, as if to suggest fair play is the governing principle. To get insight into whether there is any fairness in this game of theirs, we need only evaluate the means that they have used to achieve their goal.

Everyone involved, from the “Players” on the ground to the media cheerleaders on the sidelines deserve game misconducts and league suspensions.

From the very outset, this game has been characterized by high sticking, elbowing and no end to tripping and checking from behind. Team Owner Stephen Harper and Captain Jim Flaherty should be the co-recipients of  the Todd Bertuzzi good sportsmanship award. Unfortunately this will even sully Todd’s fine reputation for good sportsmanlike conduct.

Now on to the highlights:

(1) Blind-sided checking from behind Promised never to tax income trusts. Opposing team members rushed to hospital, still suffering nine months later. No apology, No remorse. Still maintain it was the right thing to do. Wouldn’t change a thing.

(2) Tripping Provided 18 pages of blacked-out documents as "proof" of tax leakage. The referees saw this offense in plain daylight, but ruled it conforms to the new league rules of "transparency" and "accountability". Cheerleaders in total denial. Claim they want to remain neutral as they throw their pom-poms in the air. Neutral?

(3) High Sticking Stacked the Public Hearings and employed all of the dirty tricks contained in the team’s 200 page Dirty Sportsmanship Manual including being hostile to the witnesses, fawning over government witnesses and other attempts to pre-judge the outcome and control public perceptions through a compliant media, whose coverage was equally biased and orchestrated. (Note: this matter has been referred to Canadian Broadcasting Standards Council)

(4) Slashing Advanced false statements and theories such as the supposed non-existence of the US $480 billion Master Limited Partnership market, the tax leakage impact of BCE’s sale to Private Equity via a leveraged buyout ( costing the government $793 million PER YEAR, enough to build several new stadiums) and other falsehoods consistently promulgated by the Goon Squad, but never supported by any facts.

So there you have it sports fans. This is our government’s idea of Fair play, as they pursue any means to achieve their ultimate goal of making Canada a better place for Manulife, PowerCorp, their own private pension plan and of course US private equity. The final score?

Income trusts: Minus 31.5% (resulting in the loss of $35 billion and an essential investment choice in the future)

Corporations Minus 6.2% (average corporate tax on an apples to apples comparative basis)

Great, in less than four years we’ll be back to just one team on the field. The sluggish and coddled corporations of Canada who stifle competition by taking advantage of an ignorant or duplicitous government. With no competition they’ll always be sure to win..........that is, until the world comes knocking on our door. Sorry Jimbo, that’s the big league. That’s when we will wish we had allowed this new and highly competitive low cost form of capital to flourish and not die prematurely as the result of his totally false diagnosis. By the time most people come to this realization, the whole sector will have been carried off on a stretcher, and our teams moved south of the border.

Tim Hortons anyone?

Wednesday, September 12, 2007

The lambs lie down on Bay Street

Personally, I am presently ashamed to say that I worked on Bay Street for the better part of the last 20 years, as I watch Bay Street tacitly allow the 2.5 million lambs who bought income trusts be taken off for slaughter. For lambs they truly are. These are honest hard working people, the backbone of our country, people who were deluded by the highly opportunistic falsehoods of their Prime Minister that their investments were safe from any future capricious acts of HIS government. Harper’s government actively encouraged people to believe this was an asset class that would be free from cavalier fiscal changes. All of that proved to be an outright falsehood and blatant lie.

Even worse, than the original sin of misleading people was the vastly greater sin of the fabricated reasons why the promise had to be broken. There’s no two ways about it, every segment of the Canadian society would have been better off if BCE had become an income trust rather than suffer the fate that ensued. We were predicting that inevitable fate the very first week of November 2006, so to say it wasn’t foreseeable would only be the statement of a highly incompetent or dishonest person. This is where the sin of omission of Bay Street comes in. The enormity of their silence carries with it the profound guilt of similar acts of silence of the past. To say they didn’t know better or know at all is a totally vacuous defense, both professionally and morally. Who better than our five chartered banks to know about finance? Who better than our five chartered banks to ascertain the truth about the false proposition known as tax leakage? Who more than our five chartered banks would want to uphold the integrity of our capital markets in the eyes of investors, both domestic and foreign? Who more than our five chartered banks would want to preserve this unique and vibrant ”made in Canada” market that brings Canadian investors (their clients) together with Canadian (also their clients), without the need for the Goldman Sachs’s?.

The banks’ complete silence on this matter of considerable enormity (a loss of $35 billion in Canadians’ life savings) has brought disrepute to the Canadian financial system and the faith we perhaps naively place in these people and their institutions. This is wholly unacceptable. They have taken sides on this matter by their profound and conspicuous silence. That is shameful to the extreme. Some like TD have totally crossed the moral divide by saying that they prefer the “certainty” that Flaherty’s new tax has brought to the market. Don’t kid yourself, if they liked certainty, they would have loved the certainty that Harper’s promise brought. What they’re saying is that they love the policy. I’ll let you figure out why. The “league table” below might help explain their totally self serving agenda.

Before condemning Bay Street completely, it needs to be made absolutely clear that there are a handful of analysts who have not been shy about the outright falsehoods of this government and the consequences that these falsehoods will bring to the financial security and economic sovereignty of our country. But then, none of them goes by the name of Nixon, Clark ,McCaughey, Waugh, or Downe, do they? Think of these latter individuals as Slaughterhouse Five. Where banking can be friendly. The clientele merely lambs.

Apparently, I am not alone in these views. Here is what Seymour Schulich had to say yesterday on BNN:

“No disrespect to Bay Street, who made billions of dollars selling these things and put them in all their clients’ accounts,. And abandoned everybody. No disrespect to those people. There are two and a half million people who own these things” He then went on to say how the Conservatives are throwing away the upcoming election because of this issue.

Lets examine Seymour Schulich’s statement about Bay Street:

(1) 2.5 million Canadians who own these things? Correct
(2) Abandoned them? Any one hear a pin drop yet?
(3) Made billions? Here are the underwriting fees from income trust new issuance for the last 10 years ending Halloween 2006. This excludes secondary trading commissions which would be equally immense:

CIBC $1,332,250,000
RBC $948,200,000
Scotia $749,900,000
BMO $526,900,000
TD $349,500,000
National $200,600,000

Total $4,107,350,000

Unlike Seymour Schulich, I do have considerable disrespect for these people in charge.. It’s time that the financial leadership of this country show some leadership and moral back bone. It is incumbent on them to act and not to cower in silence. That is unacceptable. If they keep up this of Silence of the Lambs routine we’ll know them for who they truly are. Ruthless, voiceless, apologists as they tacitly endorse the policies of Boutique Jim Flaherty to the detriment of all Canadians who previously had faith in their major institutions. I am sorry to report. There aren’t sides to be taken when it comes to the truth. The truth in this instance is a discernable fact. !8 pages of blacked out documents is not my version of the truth. Question: Why have you allowed it to become yours? Bad endings, by definition, start with bad beginnings. Don’t say you weren’t warned.

Sunday, September 9, 2007

New Democratic Poodles

Poodle was the term aptly coined by the British press to excoriate Tony Blair for his blind faith support of George Bush’s pretext for the invasion of Iraq, namely the existence of WMD. The British press has a way with words. It also has a way with investigative journalism. Only in Britain does it appear there are investigative journalists. Pity. Tony Blair’s blind faith belief in WMD was revealed by the British investigatove press in the Downing Street Memo affair ( which revealed the pact with Bush was based solely on blind faith.

The Canadian political scene is not without its own lap dogs. In fact there is an entire party devoted to being subservient and wholly compliant lap dogs. It’s known as the Newly Duped Poodle party of Canada. Neutered Doggie Party of Canada would be an equally descriptive name, since the NDP are seemingly emasculated in their ability to do any investigative research of their own and will glom onto any "information", no matter how false, if it supports their political dogma (poodle dogma that is). A perfect example was when Finance Critic Judy Wasylycia-Lies went off in a tirade in the House of Commons about how CAITI had supposedly donated $282,000 to the Liberal Party over the last 13 years, even though at the time CAITI had only been in existence for 4 months! Oooops! Stepped in that one didn't we Judy? Check your facts much? For the record, CAITI has a strict policy against making any political contributions whatsoever, directly or indirectly. Meanwhile, what does the concept of "due diligence" actually mean to the NDP?

This is only one example of Poodle Judy's made up facts and broad sweeping assumptions in her nonsensical pursuit of dogma. Her fallacious argument of income trusts being “Ponzi schemes” comes to mind. The biggest ponzi scheme is however the one of her own making and is contained in the many letters that her fellow Poodle Party members are sending to the vast number of concerned constituents who write to them in the belief that the NDP still represents the interests of the little guy. This form letter reads. “Dear constituent: I have spoken with Judy Wasdlylycia-Leis, our party’s Finance Critic, she is confident that the government’s estimates of future tax leakage are accurate.”

Confident? On what possible basis? Poodle logic or hard facts? Due diligence or doggie do? Given that the assertion of tax leakage is the central rationale for the double taxation of public income trusts (however no other trusts, including those public trusts being opportunistically purchased by pubic sector pension which for then only are exempt from this punitive tax), and given that 2.5 million Canadians have lost $35 billion in their life’s savings and an essential investment choice going forward,

I have one question for Jack and Judy: On what basis? Blind Faith? Wishful thinking? Heel boy? Does the NDP believe in an open and transparent government or not? Was it not the NDP that sought an investigation into the alleged leak of information in September 2005 that had the effect of moving the market in the hours before Goodale’s income trust announcement.? Judy Wasylycia-Lies was all over the RCMP, the SEC and the OSC demanding an investigation into this one day trading blip when the Liberals were in power. Now that Canada's New Masterful Government (TM) hold the leash, she’s in total lap dog mode. From pit bull to poodle. Who neutered Judy,and why? Who in the end was the sole alleged guilty party who was charged by the RCMP? Correct, Serge Nadeau, Director General of Tax Policy. Face it Judy, Ottawa has its fair share of corrupt bureaucrats in high places. Not to mention intellectually corrupt politicians. Is it not possible that these same corrupt folks are the ones with something to hide behind the 18 pages of blacked out documents? Isn't your innate sense of political curiosity aroused just a little, when these same bureaucrats send letters requesting these blacked out documents be returned immediately?

Jack and Judy: what are you people made of and what do you really stand for? So far your performance is an abysmal farce. Do you really want to go down in history as the two top dogs in Canadian politics, Poodle division?

Enjoy it while it lasts, as you're sure to be dog meat in the coming election. We know that it was your new masters in Corporate Canada who threw you this bone. However, Canadians don’t need lap dogs in office. Lap dog politicians like the two of aren’t man’s best friends. Now go lie down. You've done enough fetching to last a lifetime. Measured in man years

Friday, September 7, 2007

Governments that Lie; Knowingly.

I am in the process of compiling a list of Governments that Lie.; Knowingly. I have provided the initial two entries. If you are aware of any other examples please forward me your contributions in the format below:

George W Bush and the Republican Administration of 2000- 2008

Lie: Iraq possesses weapons of mass destruction
False Pretense: as contained in Colin Powell presentation to UN Security Council
Ulterior Purpose: Multiple in Nature: False provocation. National Security. Energy Security. Avenge Saddam because Saddam wanted to kill George W. Bush’s father (you’ll have to talk to George W. about this one, because it’s news to me)
Cheerleaders: Cheney, Wolfowitz
Main Spearchucker: You go to war with what you got, smaller is better Don Rumsfeld
Major Beneficiaries: Haliburton, Carlyle Group and the rest of Eisenhower’s military industrial complex crowd.
Organ Grinders: New York Times, Washington Post, main stream media at large
Poodles: Tony Blair, Stephen Harper
Not so easily fooled. Chirac, Cretien, UN
Conspicuous by its absence: UN resolution, provocation, any link to 9/11
Fallback Pretense: Democratize the region
Make it sound good award: The Patriot Act
Mission Accomplished: Major loss of human life, untold suffering, sectarian violence, instability in the region. lessened National Security, lessened Energy
Security. Saddam dead, Herbert Walker is now safe
Political Impact: Lowest polling President in modern history, Major reputational damage to how US is perceived in the world

Stephen Harper and Canada’s New Government of 2006 – present

Lie: Income trusts cause tax leakage and are “a clear and present danger” (Jim Flaherty)
False Pretense: as contained in 18 pages of blacked out documents
Ulterior Purpose: Multiple in Nature: Appease Corporate Canada as generally defined by membership of CCCE. Facilitate BCE’s private takeout. Pander to Wall Street, Henry Paulson. Goldman Sachs and US private equity. Deliberate carve out for gov’t pension plans.
Cheerleaders: Mark Carney of Finance Department, formerly of Goldman Sachs, Gwynn Morgan. Tom D’Aquino on behalf of Corporate Canada ( with echo chamber support from C.D. Howe Institute)
Main Spearchucker: “It’s not my fault”, “I am the Finance Minister of the entire country now”, Boutique Jim Flaherty
Major Beneficiaries: Manulife, Power Corporation, Suncor, BCE (management and board only) and the rest of Tom D’Aquino’s Corporate Canada Country Club.
Organ Grinders: CTV Bell GlobeMedia, CanWest Global Media and whatever else isn’t already owned by those two that constitutes the main stream media in Canada
Poodles: Judy Wasylycia-Leis, David Dodge, Eric Reguly
Not so easily fooled: Diane Francis, Seymour Schulich, and basically anyone with brains and balls.
Conspicuous by its absence: CBC, Senate, any link to tax leakage
Fallback Pretense: Ponzi scheme, nation of coupon clippers etc., etc., ad naseum
Make it sound good award: The Tax Fairness Plan
Mission Accomplished: Tax leakage of over $1 billion per year ($793 million a year from BCE alone), estimated to increase to $7.5 billion a year over the next 24-36 months
Political Impact: Canada’s New Government (TM) is “stagnating” in the polls. Harper’s much sought after majority government is illusive, like his policy justifications. Major reputational damage to how Corporate Canada is perceived by investors.

Tuesday, September 4, 2007

John Manley's different take on "different"

I would really enjoy the opportunity of debating someone like John Manley on his myopic views on income trusts. The debate might go something like this:

BF: “Mr. Manley, could you please repeat the comment you provided the Globe on Friday as your rationale for why double taxing income trusts with the resultant loss of $35 billion is justified?”

JM: “ "I don't think you can run an economy where you have different kinds of business vehicles that are taxed totally differently."

BF: “Mr Manley, you work for McCarthy Tetrault, a large law firm geared to corporate clientele do you not”.

JM: “Yes, I am the firm’s counsel.

BF “ Are you not aware that McCarthy Tetrault is a limited partnership, which is virtually identical to an income trust, except in name? Exactly how much tax does McCarthy Tetrault pay at the partnership level”

JM: “McCarthy Tetrault pays no taxes, but that’s different.”

BF: “Different you say. I thought you said different kinds of businesses should not be taxed differently. If that’s the case, wouldn’t it follow that McCarthy Tetrault should be taxed at the rate of 31.5% rather than zero? What’s the difference? If it’s good for the goose, surely it’s good for the gander.”

JM: “Well I was referring to a different kind of different. Not the kind of different that would affect me and my personal well being or that of my 700 law partners at McCarthy’s.”

BF: “Mr Manley, perhaps you are referring to the US version of different. Are you not aware of the US Public Limited Partnership market? This is a $480 billion public market, where no taxes are paid by the issuing entities, just the investors, making it the equivalent of income trusts before Flaherty got involved”

JM: “Of course I am aware of MLPs, but that’s different.”

BF: “Mr Manley, you seem to be having a hard time differentiating between the differences that matter and the differences that don’t matter. Perhaps you could reveal whose interests you are representing and we could better understand the cognitive dissonance that you are experiencing, since it appears that there may be a difference as to which side your bread is buttered on, now that you’ve entered the private sector.